iHeartMedia (NASDAQ:IHRT) Has Some Difficulty Using Its Capital Effectively
What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, iHeartMedia (NASDAQ:IHRT) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for iHeartMedia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$262m ÷ (US$6.9b - US$743m) (Based on the trailing twelve months to September 2023).
Thus, iHeartMedia has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.2%.
View our latest analysis for iHeartMedia
In the above chart we have measured iHeartMedia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The trend of ROCE at iHeartMedia is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 4.3% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 40% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Key Takeaway
To see iHeartMedia reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 81% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing: We've identified 3 warning signs with iHeartMedia (at least 2 which are potentially serious) , and understanding these would certainly be useful.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
